In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest. The following is an outline of the opportunities that we think deserve a second look.
THB Global Microcap Fund
We recently met the team who manage the THB Global Microcap fund. We have been talking to Brookvine their Australian partner for some time. Essentially the fund gives a dedicated exposure to US Small and Micro-cap stocks, THB or Thomson Horstman and Bryant has been managing this fund since 1982, has a small team of 17 people and manages just under $800 million US. The definition of a US Small or Microcap stock is something still very large in our Australian language, the average company has a value of Us$530million. The funds aim is to outperform the Russell Micro cap Index net of fee by 4% every year. The fund since inception has been doing this comfortably, with a return since 1998 of 14.8% per annum versus the index of 8.2%, and the S&P of only 6.7%. The interesting thing to note is that the annualised volatility of their fund is only slightly above that of the S&P 12.8% vs 10.1% They have been able to achieve such a return by having a true long term view, while constructing, well-funded, low risk companies that have been able to grow revenue, earnings and book value through internally generated cash flows. Essentially the ream has a well proven process of generating ideas, doing the fundamental research and then construction portfolio, while applying risk monitoring while the position is held.
Reasons for liking this sub sector
- 45% of the US Microcap universe has no published earnings estimates, offering opportunities for active management;
- The sector is neglected by the major research houses on Wall Street;
- Management skill has enormous impact on the direction of smaller, mostly single product line companies;
- 60% of all microcap companies have zero debt;
- Microcap companies typically have strong alignment with ownership and control;
- The returns of this sector has been enormous, in fact your portfolio would have done 3.2 times better than investing into the S&P 500.
- The median CEO is paid total compensation of $1.7million in the microcap sector, versus the S&P 500 where it is $11.7million.
Should you consider investing?The fund offers investors an exposure to a very interesting space in the US Market. They fund has done very well for a very long period, the management and process seem very sound. Not for everyone, but one that investors looking for a real return over the next 5 years should consider. The fund is available at a minimum of $50,000 and has a cost of 1.25% per annum.
CBA XI CAPITAL NOTES
Commonwealth Bank of Australia, or Commonwealth Bank, will raise AUD 750 million in a debt form instrument—to be listed on the Australian Securities Exchange, or ASX, they will be called CommBank PERLS XI Capital Notes, their ASX code will be CBAPH. This issue will provide Additional Tier 1, or AT1, regulatory capital for Commonwealth Bank.
Any holders of a holder note the CommBank PERLS VI Capital Notes (ASX Code: CBAPC) will be asked if they want to reinvest CBAPH.
CBAPH is a fully paid, convertible, transferrable, redeemable, subordinated, perpetual, unsecured note with a AUD 100 face value and mandatory exchange date of April 26, 2026.
Mandatory exchange on that date is subject to exchange conditions. CBAPH may be exchanged earlier as a result of a trigger event or Commonwealth Bank exercising an option to call the security two years early on April 26, 2024.
Distributions are discretionary, noncumulative and fully franked with a dividend stopper. Distributions will be paid quarterly in arrears, based on the 90-day bank bill swap, or BBSW, rate plus a margin in the indicative range of 3.70% to 3.90% per year. For example, using the current 90-day BBSW rate of 1.91%, this equates to a gross running yield in the range of 5.61% to 5.81% per year
Face value: AUD 100 per security.
Minimum subscription amount: AUD 5,000 (50 units).
Amount to be raised: Commonwealth Bank plans to raise AUD 750 million via the issue of 7.5 million securities, the securities will pay 90 Days BSBW plus between 3.7-3.9%. This assumes the CBAPH distribution is fully franked.
Frequency of distributions: Quarterly on March 15, June 15, Sept. 15, and Dec. 15. × Franking: Distributions are fully franked. If a distribution is not franked, the cash distribution amount will be increased to compensate for any franking shortfall.
Dividend stopper: If a CBAPH distribution is not paid in full within five business days of the scheduled payment date,
(refer to Septembers monthly for a full article on franking credits and the affects legislation change)